14.

Income Taxes

We are subject to income tax in the U.S. federal jurisdiction and various state and foreign jurisdictions and have identified our federal tax return and tax returns in California and Massachusetts as “major” tax filings. U.S. federal tax examinations through 1998 have been concluded. Our U.S. federal tax returns for the years 1999 through 2005 were not reviewed and are no longer open to examination by the Internal Revenue Service. Our U.S. federal tax returns for 2006 and subsequent years remain open to examination. Our California and Massachusetts tax returns for the years 2006 and 2007, respectively, and subsequent years remain open to examination.

The Company is currently under audit examination by the IRS for the 2008 and 2009 tax years, which began in July 2011. To the extent the final tax liabilities are different from the amounts originally accrued, the increases or decreases will be recorded as income tax expense or benefit in the consolidated statements of operations. While the actual outcome is subject to the completion of these audits, we do not believe there will be a material adverse impact on the Company’s results of operations.

Current taxes receivable were $1.0 million at December 31, 2011, compared to $0.2 million at December 31, 2010.

The components of our provision for income taxes for 2011, 2010 and 2009, consisted of the following:


	Year ended December 31,
(Dollars in thousands)	2011		2010			2009
Current provision:
Federal	$	86,220	$	47,794		$	25,300
State		25,505		15,042			7,813
Deferred expense (benefit):
Federal		5,756		(1,157	)		1,445
State		1,606		(277	)		649

Income tax expense	$	119,087	$	61,402		$	35,207

Our effective tax rate is calculated by dividing income tax expense by the sum of income before income tax expense and the net income attributable to noncontrolling interests. The reconciliation between the federal statutory income tax rate and our effective income tax rate for 2011, 2010 and 2009, is as follows:


	Year ended December 31,
	2011		2010		2009
Federal statutory income tax rate		35.0%		35.0%		35.0%
State income taxes, net of the federal tax effect		6.0		6.2		6.6
Meals and entertainment		0.5		0.7		0.9
Share-based compensation expense on incentive stock options and ESPP		0.3		1.2		2.8
Disallowed officer’s compensation		0.1		0.3		1.2
Goodwill impairment—eProsper		—		—		1.7
Tax-exempt interest income		(0.4)		(0.9)		(1.7)
Low-income housing tax credit		(1.1)		(2.4)		(5.2)
Other, net		0.5		(0.8)		1.0

Effective income tax rate		40.9%		39.3%		42.3%

Deferred tax (liabilities) assets at December 31, 2011 and 2010, consisted of the following:


	December 31,
(Dollars in thousands)	2011			2010
Deferred tax assets:
Allowance for loan losses	$	45,521		$	40,633
Share-based compensation expense		9,786			8,062
Loan fee income		8,969			7,533
State income taxes		6,576			3,636
Net operating loss		6,089			3,992
Other accruals not currently deductible		6,010			2,601
Research and development credit		364			237
Premises and equipment and other intangibles		—			2,096
Derivative equity warrant assets		—			1,270
Original issuance discount on 2008 convertible notes		—			1,212
Other		16			18

Deferred tax assets		83,331			71,290
Valuation allowance		(6,453)			(4,229)

Net deferred tax assets after valuation allowance		76,878			67,061

Deferred tax liabilities:
Net unrealized gains on available-for-sale securities		(59,180	)		(16,696	)
Nonmarketable securities		(14,478	)		(6,965	)
Derivative equity warrant assets		(5,428	)		—
Premises and equipment and other intangibles		(4,515	)		—
FHLB stock dividend		(1,252	)		(1,251	)
Other		—			(278	)

Deferred tax liabilities		(84,853	)		(25,190	)

Net deferred tax (liabilities) assets		$(7,975)			$41,871

At December 31, 2011 and 2010, federal net operating loss carryforwards totaled $15.8 million and $10.4 million, respectively, and state net operating loss carryforwards totaled $7.8 million and $5.2 million, respectively. These net operating loss carryforwards expire at various dates beginning in 2013 and ending in 2030. A portion of our net operating loss carryforwards will be subject to provisions of the tax law that limits the use of losses that existed at the time there is a change in control of an enterprise. At December 31, 2011, the amount of our federal and state net operating loss carryforwards that would be subject to these limitations was $7.2 million and $2.2 million, respectively.

We believe that it is more likely than not that the benefit from these net operating loss carryforward and research and development credits associated with eProsper will not be realized due to the lack of future profitability in that business. In recognition of this risk, we have provided a valuation allowance of $6.5 million and $4.2 million on the deferred tax assets related to these net operating loss carryforward and research and development credits at December 31, 2011 and 2010, respectively. We believe it is more likely than not that the remaining deferred tax assets will be realized through recovery of taxes previously paid and/or future taxable income. Therefore, no valuation allowance was provided for the remaining deferred tax assets.

A summary of changes in our unrecognized tax benefit (including interest and penalties) in 2011 is as follows:


(Dollars in thousands)	Reconciliation of Unrecognized Tax Benefit			Interest & Penalties			Total
Balance at December 31, 2010	$	296		$	134		$	430
Additions based on tax positions related to current year		272			—			272
Additions for tax positions for prior years		136			40			176
Reduction for tax positions for prior years		(6	)		(2	)		(8	)
Reduction as a result of a lapse of the applicable statute of limitations		(58	)		(32	)		(90	)

Balance at December 31, 2011	$	640		$	140		$	780

At December 31, 2011, our unrecognized tax benefit was $0.8 million, the recognition of which would reduce our income tax expense by $0.6 million. We expect that our unrecognized tax benefit will change in the next 12 months; however we do not expect the change to have a significant impact on our financial position or our results of operations.